January 2022 | Issue 241

CLOs prove resistant to omicron in boost for new issue market

Michelle D'Souza headshot
Michelle D’souza
Sayed Kadiri headshot
Sayed Kadiri
The CLO market has withstood the impact of the omicron coronavirus variant with barely a dent on CLO liability pricing.
Shockwaves from news of the variant on 26 November, which sent CDS indices out 30 basis points, have been felt across the loan market. But primary CLO economics have been boosted and there were several days in early December where US CLO issuance topped $1 billion.
Sixth Street managing director Kristen Erickson, who leads the firm’s structured credit investing, says there is an opening in the new issue CLO market.
“We had increased macro volatility and there has been some loan volatility, predominantly driven by retail funds shedding assets,” she says. “There may be an opportunity for CLO managers to price print and sprint transactions or, even more simply, to ramp attractive loans in open warehouses.”
“There may be an opportunity for managers to print and sprint”
Kristen Erickson, Managing director | Sixth Street
Taking the equity in such a CLO could be an attractive proposition, adds Erickson. But she says investors should be wary of the difficulty of getting a transaction priced and closed before year end, given the backlog caused by the Libor-Sofr transition.
Filippo Sampietro, partner at Serone Capital Management, says European CLO equity arbitrage works as long as there are no further negative headlines.
“If the macro picture remains supportive, the pipeline will somehow get done,” London-based Sampietro says. “If not, there could be delays and the whole market could slow down.”
Some CLO managers have been emboldened to invest in covid-impacted industries. London-based Guillaume Tarneaud, partner and portfolio manager at CVC Credit, says the omicron variant will not change the firm’s strategy of investing in market leaders — even in some covid-impacted industries — so long as the long-term view of the business is good.
So far, it seems omicron should be controllable, he says. “We’ve also seen some M&A activity in the leisure and travel space recently, which shows private equity sponsors take a five-year or longer-term view.”
In contrast to the boost received by the primary market, CLO trading opportunities dried up in late November. Sampietro says that in the immediate aftermath of omicron being discovered, European CLOs were quoted slightly lower across the capital structure.
Erickson says discounted junior CLO debt has been attractive in early December, but it is difficult to source.
“The trend has been towards CLOs being held by more stable hands,” says New York-based Erickson, the former global head of CLO/CDO trading at JP Morgan. “That means it takes more prolonged pressure before CLO investors decide to sell.”
Share this article:
Global credit funds & CLO's
January 2022 | Issue 241
Published in London & New York.
Copyright Creditflux. All rights reserved. Check our Privacy Policy and our Terms of Use.